Assessing income streams paid from Self-Managed Superannuation Funds (SMSFs) or Small APRA Superannuation Funds (SAFs) 108-05060070

Self-Managed Superannuation Funds (SMSFs) and Small Australian Prudential Regulation Authority (APRA) Superannuation Funds (SAFs) were formerly known as 'Do-It-Yourself funds' or 'Excluded Funds'. This procedure provides information about income streams paid from SMSFs and SAFs.

Customers may set up their own superannuation funds, known as SMSFs or SAFs. An SMSF is a fund with less than 7 members. All members are trustees of the super fund or directors of the trustee company if a corporate trustee is present. The fund could also have only one member. See the References page for more information about these exceptions. The Australian Taxation Office (ATO) regulates SMSFs.

Superannuation funds with fewer than 7 members that do not meet the conditions to be classed as an SMSF are SAFs. SAFs differ from SMSFs because they must have a corporate trustee approved by Australian Prudential Regulation Authority (APRA). APRA regulates SAFs.

Most SMSFs and SAFs can be identified by their name. The name of the SMSF often includes the customer's family name in the fund name however, this is not necessary. The income stream schedule (SA330) also assists in identifying whether the income stream is paid from an SMSF or a SAF.

Note:

• from 1 January 2019, it is mandatory for income stream providers to report income stream information to Services Australia electronically, to update income streams during the income stream reviews. The automated income stream review process excludes income streams paid from an SMSF or SAF. The current letter reviews will continue for income streams from SMSFs and SAFs.
• from 1 July 2021, the maximum number of members for SMSFs and SAFs increased from 4 to 6.

These funds were originally able to offer the following income streams:

• lifetime
• life expectancy
• market-linked
• account-based income streams

Now, only account-based income streams and in some cases market-linked income streams (MLI) can commence from these funds.

Account-based income streams

Account-based income streams (also known as allocated income streams) are the most common type of asset-tested income stream customers would receive from their SMSF or SAF.

Market-linked income streams (MLIs)

From 20 September 2004, SMSFs and SAFs can offer MLIs. They are also known as Term Allocated Pensions. These are 50% ATE if purchased before 20 September 2007 and non-commutable, except in very limited circumstances.

As of 20 September 2007, new MLIs cannot be purchased. The exception is an existing asset-test exempt MLI can be fully commuted and directly transferred (rollover) to a new MLI which complies with section 9BA.

An asset-tested MLI is also non-commutable, except in very limited circumstances. Note: under the permanent debt relief conditions available from 25 August 2011, an existing asset-test exempt lifetime or life expectancy income stream can be fully commuted and directly transferred to an asset-tested market-linked income stream.

Lifetime and life expectancy income streams

Asset-test exempt (ATE) lifetime or life expectancy income streams must:

• meet all the characteristics of an ATE income stream, including actuarial certification, and
• meet the documentation requirements

Note: MLIs are not required to supply additional documentation, including actuarial certificate, which is required for ATE lifetime and life expectancy income streams

Income streams commenced before 20 September 2004, which meet the characteristics for asset-test exemption, are 100% ATE.

Income streams commenced in the period of 20 September 2004 to 19 September 2007, which meet the characteristics for asset-test exemption, are 50% ATE.
Note: SMSFs and SAFs have not been permitted under the SIS rules to offer compliant lifetime or life expectancy income streams since 1 January 2006.

All income streams purchased from 20 September 2007 are fully assets tested. Exception: in a limited number of circumstances, certain ATE lifetime and life expectancy income streams purchased before 1 January 2006 that are commuted and rolled over into certain types of post 20 September 2007 ATE income streams, retain a 100% or 50% asset-test exemption (whichever is applicable), if certain conditions are satisfied, see commutation rules below. These conditions include commuting the income stream and purchasing an equivalent ATE income stream with the same level of asset-test exemption. For more information on the eligibility criteria and conditions for retaining ATE status, see the References page.

Commutation of original ATE income stream and rollover to a new ATE income stream on or after 20 September 2007

Lifetime and life expectancy ATE income streams that commenced before 1 January 2006 can continue to make payments, but if these income streams are commuted, the assets can only be used to purchase certain types of income streams. The type will depend on the commencement date of the original income stream. It must also be an allowable commutation and the conditions for retaining the ATE status must be met. The income stream must be fully commuted and all assets including the reserves used to purchase the new income stream for retaining the ATE status. See the References page for more information on the eligibility criteria and conditions for retaining ATE status.

Original lifetime or life expectancy ATE income stream purchased before 20 September 2004 (100% ATE income stream)

The commuted assets can only be used to purchase a lifetime or life expectancy ATE income stream directly from a retail provider under the conditions for retaining asset-test exemption. If the customer commutes a 100% ATE income stream and directly rolls over the proceeds to a MLI on or after 20 September 2007, the commutation is treated as a non-allowable commutation. The original income stream should be treated as if it had never been ATE and this will result in a debt being raised under section 1223A of the Social Security Act 1991. The MLI should be assessed as an asset-tested income stream as the purchase date is on or after 20 September 2007. Note: the permanent debt relief is available from 25 August 2011. This relief is not the same as the temporary (old or enhanced) debt relief available in the 2009-2010 financial year. Under the permanent debt relief, any debt raised because of the non-allowable commutation can be waived under section 1237AB of the Social Security Act 1991.

Original lifetime or life expectancy ATE income stream purchased on or after 20 September 2004 and before 1 January 2006 (50% ATE income stream)

The commuted assets may be used to purchase a market-linked income stream (MLI) from an SMSF or SAF, or an ATE lifetime or life expectancy or MLI directly from a retail provider under the conditions for retaining asset-test exemption. Note: the permanent debt relief is also available to customers with 50% ATE income streams from their SMSFs or SAFs, who can restructure by a full commutation and rollover into an asset-tested MLI, either from a retail provider or within their fund at any time, regardless of whether they meet high probability requirements or not.

The purchase price of an income stream paid from an SMSF or SAF is the sum of the payments made to purchase the income stream, minus any commutations.

The purchase price of an individual's income stream paid from the SMSF or SAF is drawn from the member's beneficial interest in the fund. However, the whole interest may not necessarily be used to purchase one income stream. It is common for a member to have an ATE product and an account-based product.

A defined benefit income stream for social security purposes (section 9(1) of Social Security Act 1991) (SSA) is an income stream where payments are defined by factors like:

• years of service
• final salary or final average salary over recent years, or
• by criteria determined by the fund's governing rules

Payments are not defined by amount of funds used to purchase the income stream.

Pensions (except allocated and market-linked pensions) paid from SMSFs and SAFs are classified as 'defined benefit pensions' under section 228 of the Superannuation Industry (Supervision) (SIS) Act 1993. However, they are not defined benefit income streams for the purposes of the SSA.

Account-based income streams and market-linked income streams

A Details of income stream product form (SA330) or a similar income stream schedule must be obtained from the customer. The form/schedule must be signed by the Trustee of the fund (generally the customer), who may obtain assistance to complete the details from their accountant or financial adviser. Some SMSFs may have a retail provider as their administrator, for example, AMP or MLC, who may complete the form.

Lifetime or Life expectancy income stream

A customer, or trustee of the fund (often the customer), receiving a lifetime or life expectancy income stream from an SMSF or SAF wanting ATE status for the income stream, must supply documentation about the income stream to the agency. This allows assessment of whether the product meets the requirements of section 9A or 9B of the Social Security Act 1991 (SSA). Any deficiencies in the information provided may delay the assessment of the income stream.

The trust deed or governing rules must specify the exact terms and conditions of the income stream, including required characteristics of an ATE lifetime or life expectancy income stream. If not, a contract or other documentation (trustee letter, trustee resolution or minutes or agreement) with a full and accurate description of the benefits certified by the trustees of the SMSF or SAF is required. Specifying the required characteristics in any of the documentation assists the agency to determine if the product complies with section 9A or 9B of the SSA. The required documentation provides the agency, with clear details of the benefit provided by the superannuation fund to the individual.

SMSFs and SAFs paying an asset-test exempt (ATE) lifetime or life expectancy income stream are subject to annual actuarial review. A customer has to provide a new actuarial certificate at the end of every 12 month 'in force' period of the certificate. Note: there is a grace period of 6 months following the expiry of the previous actuarial certificate, during which time a new certificate can be provided. Actuarial certificate reviews are initiated in August. The actuarial certificate must be referred to a Complex Assessment Officer (CAO) to check if the certificate expresses a 'high probability' opinion that the fund can make the income stream payments specified in the trust deed or governing rules. This is necessary for determining the ongoing asset test exempt status of the product.

Previously, cases were referred to the Australian Government Actuary (AGA) to assess asset test exempt (ATE) lifetime and life expectancy income streams for deprivation. From 27 October 2011, this is no longer necessary as deprivation is assessed from commencement of the income stream and cannot have occurred in the last 5 years. Deprivation occurred where the purchase price of an ATE lifetime or life expectancy income stream was greater than the present value of the future payments from the income stream. As the present value was not readily identifiable, a valuation by AGA was necessary. To determine if deprivation had occurred, the agency compared the present value of the ATE income stream over its term or life (as calculated by the AGA) with the purchase price. If deprivation had occurred, normal deprivation procedures were applied, including allowable disposal rules.

A deprivation assessment could only be conducted after a customer purchases an ATE lifetime or life expectancy income stream. The assessment could not be reviewed or reassessed as it related to the purchase of the ATE income stream, which could not be reversed.

Since 27 October 2011, Australian Government Actuary (AGA) valuations are no longer requested for ATE lifetime or life expectancy income streams paid from SMSFs and SAFs for deprivation and return of purchase price. Note: AGA valuations are not required for ATE market-linked income stream (MLI).

Additional documentation is required if the product complies with section 9A or 9B of the Social Security Act 1991. This documentation should be sent to a Complex Assessment Officer (CAO) for assessment.